Saturday, March 27, 2010

I had been looking into education financing methods when this Op-Ed, by David Brooks, came out. He describes the substantial shortcomings of modern economics. It traditionally implies perfectly rational people who always make utility-maximizing decisions.

This is not so, he says. In fact, rationality--though a useful assumption for making early headway in the field--is hardly an appropriate characterization of human behavior.

As I have been looking into taking out ridiculously large loans in the coming year, I have been discussing the situation with my father, who teaches physical therapy at a nearby university. Apparently, his program is a cash cow for the school, bringing in mid-30s tuition fees per student, who then go on to making between 50 and 70k a year. So that's a $150,000 debt students are paying down over the next 10 years at approximately $2,200 a month. Worse off are the female students who decide to have children within three years of graduation, thereby deferring their debt repayment by many years as interest accrues.

I should remind the reader, the program is a cash cow, meaning, it makes a disproportionate amount of money for the school in comparison to the other programs, in effect allowing physical therapy students to finance other programs in the university.

Then how is the cost of tuition set? It all comes down to "what the market will bear" (and is decided by university administrators, not professors). This is an explanation meant to soothe the conscience, suggesting the market is an all-benevolent invisible hand.

This is where the David Brooks article becomes relevant: should students taking out oversized loans be considered rational behavior? I know that for myself, it is hard to grasp the full implications of having nearly $60,000 in loans hanging over my head. Additionally, my main source of consolation is in knowing many other students have taken out even larger loans. Would I be doing this if it were not a cultural norm? And if it were not a cultural norm, would tuition costs have ever come so high?

This seems to represent an instance of a market pathology where individuals are rather removed from a realistic sense of the dollar values they are dealing with. I don't think it is very clear at all that the decisions to take out student loans are utility-maximizing.

So my point: should universities use this stripped-down,"all-humans-are-perfectly-rational" version of market economics to soothe their consciences? I don't. For programs that do not produce high-salaried graduates, I think it should agitate their sleep.